Surviving State Audits

States are growing increasingly assertive in pursuing taxes from out-of-state businesses. The trend will only intensify, thanks to federal cutbacks.

You can protect your company against state audits. Just listen to Connie Cummings, chief financial officer of $28-million Business Wire, a media-relations wire service that is headquartered in San Francisco but files tax returns in the 13 states where the company maintains offices.

"We've gone through many state audits -- last year alone, probably half a dozen," Cummings says. "They can be very confusing because state laws differ so significantly, and some states are much more aggressive than others." Her advice to other companies:

· Keep comprehensive records. "States -- especially in the South -- chase after you for sales taxes that they claim you owe. If you disagree, it helps if you can document where you purchased, physically assembled, or shipped the equipment in question."

· Investigate state laws before making business decisions. "Rules vary so widely that you can't count on, say, a vendor to give you the right information. The consequences of acting on bad information can be costly: if you even inadvertently pay the wrong amount of sales tax, you may be liable for penalties."

· Use local advisers when necessary. "We're appealing a Tennessee decision that could cost us a lot, so it made sense to hire a local attorney who knows the intricacies of Tennessee's tax law. You have to evaluate that option with each audit."